Chevron Philippines, Inc.

February 22, 2007 BIR RULING [DA-117-07] RR-8-96; 148 No. 002-2000 Chevron Philippines, Inc. 6th Floor, 6750 Building 6750 Ayala Avenue 1226 Makati City Attention: Mr. Augusto C. Cabugao Atty. Raissa R. Bautista Atty. Ronald V. Bernas Gentlemen : This refers to your letter dated July 25, 2006 requesting for confirmation of your opinion that while the blending of Light Straight Run (LSR) Naphtha with certain variations of Research Octane Number (RON) gasolines, in order to produce Regular (81 RON) and Premium Unleaded (93 RON and 95 RON) gasolines is within the contemplation of the term "reprocessing" or "manufacturing" under Revenue Regulations No. 8-96, the Regular or Premium Unleaded gasoline products are no longer subject to the excise tax of P4.35 per liter of volume of capacity provided under Section 148 of the Tax Code, as amended by Republic Act No. 9337, since the Naphtha and RON gasoline components thereof have already been subjected to the same P4.35 excise tax per liter of volume capacity upon their importation. Background Chevron Philippines Inc. or CPI (formerly Caltex [Philippines], Inc.) is a corporation duly organized and existing under the laws of the Republic of the Philippines, with principal place of business at the 6th Floor, 6750 Building, 6750 Ayala Avenue, 1226 Makati City. As provided in its Articles of Incorporation, CPI is authorized to engage in the refining, selling and otherwise dealing of petroleum, its products, compounds and derivates and other minerals and chemical substances. HCaEAT With the current global increase in the prices of petroleum products, CPI would like to take advantage of opportunistic cargoes, whenever economics would show that it is more favorable to purchase blendstocks rather than finished gasolines. This option will therefore enhance CPI's supply chain capability for motor gasoline and consequently enable it to respond to the demand pattern changes in the Philippines among the different motor gasoline grades. Further, this option will also enable CPI to supply fuels to the consumers at lesser outflow of US Dollar resources. The blending will take place in some blending tanks of CPI in its Batangas Terminal. The proposed blend combination or formula between RON gasolines and LSR Naphtha will vary depending on the quality of the starting materials. Nevertheless, the blend will always be fine tuned to the controlling quality and for the resulting product specification to meet both Chevron Guaranteed Specifications and Philippine National Standards specifications for Regular and Premium Unleaded gasolines. For example, the succeeding combinations will produce the following local grade gasolines: aCHcIE (1) For Regular (81 RON) Gasoline: Blend of 40% LSR Naphtha and 60% 89 RON Blend of 50% LSR Naphtha and 50% 92 RON (2) For Unleaded (93 RON) Gasoline: Blend of 15% LSR Naphtha and 85% 97 RON Blend of 50% 89 RON and 50% 97 RON Blend of 70% 92 RON and 30% 97 RON (3) For Unleaded (95 RON) Gasoline: Blend of 10% LSR Naphtha and 90% 97 RON Blend of 20% RON and 80% 97 RON Blend of 30% 92 RON and 70% 97 RON The LSR Naphtha will be purchased by CPI from domestic and/or regional sources while the RON stocks will be imported. Thus, the excise tax due upon the importation thereof will be paid upon such importation at the Bureau of Customs (BOC) Port of Batangas. This option will therefore enable CPI to supply fuels to the customers at lesser outflow of US Dollar resources and also indirectly pass on to the consumers a uniform and correct P4.35 excise tax rate per liter, as part of its purchase price. In rely thereto, please be informed that Section 148 of the Tax Code of 1997, as amended by Republic Act (RA) No. 9337, provides: acHCSD "SEC. 148. Manufactured Oils and Other Fuels . There shall be collected on refined and manufactured mineral oils and motor fuels, the following excise taxes which shall attach to the goods hereunder enumerated as soon as they are in existence as such: xxx xxx xxx (e) Naphtha, regular gasoline and other similar products of distillation, per liter of volume capacity, Four pesos and thirty-five centavos (P4.35) : Provided, however, That naphtha, when used as a raw material in the production of petrochemical products or as replacement fuel for natural-gas-fired-combined cycle power plant, in lieu of locally-extracted natural gas during the non-availability thereof, subject to the rules and regulations to be promulgated by the Secretary of Energy, in consultation with the Secretary of Finance, per liter of volume capacity, zero (P0.00): Provided, further, That the by-product including fuel oil, diesel fuel, kerosene, pyrolysis gasoline, liquefied petroleum gases and similar oils having more or less the same generating power, which are produced in the processing of naphtha into petrochemical products shall be subject to the applicable excise tax specified in this Section, except when such by-products are transferred to any of the local oil refineries through sale, barter or exchange, for the purpose of further processing or blending into finished products which are subject to excise tax under this Section; (f) Leaded premium gasoline, per liter of volume capacity, Five pesos and thirty-five centavos (P5.35); unleaded premium gasoline, per liter of volume capacity, Four pesos and thirty-five centavos (P4.35) xxx xxx xxx." (Emphasis Supplied) In relation thereto, Section 2 of Revenue Regulations No. 8-96 defines the term "Reprocessing" as follows "(o) Reprocessing synonymous to 'manufacturing' as contemplated under Section 187 (x) of the Tax Code of 1977. Manufacturing refers to the physical or chemical process which alters the exterior texture or form or inner substance of any raw materials or manufactured or partially manufactured product in such manner as to prepare it for a special use or uses to which it could not have been put in its original condition, or any such process which alters the quality of any such raw material or manufactured or partially manufactured product so as to reduce it to marketable share or prepare it to any of the uses of industry, or by any such process which combines or blends any such raw material or manufactured or partially manufactured products with other materials or products of the same or of different kinds and in such manner that the finished product of such process or manufacture can be put to a special use or uses to which such raw material or manufactured or partially manufactured product, in their original condition could not have been put, and which in addition alters such raw material or manufactured or partially manufactured products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and not for his own use or consumption." cHESAD Thus, in BIR Ruling No. 002-2000 dated January 4, 2000, it was held that the commingling of tax-paid unleaded gasoline with leaded gasoline in order to produce leaded gasoline with higher than the allowable 0.013 grams per liter lead content, falls within the contemplation of the term "reprocessing" or "manufacturing" under Revenue Regulations No. 8-96 since the same altered the exterior texture or form or inner substance or quality of the manufactured products. Moreover, the BIR held that inasmuch as the excise tax of P4.35 had already been paid for the unleaded portion, only the difference of P1.00 per liter should be paid by the oil company so that only the correct tax of P5.35 per liter will be indirectly passed on to the consumers as part of their purchase price. It should be noted that prior to the effectivity of Republic Act No. 9337, regular gasoline was subject to P4.80 excise tax per liter of volume capacity, while unleaded premium gasoline was subject to P4.35 excise tax per liter of volume capacity. However, upon the effectivity of RA 9337, regular gasoline and unleaded premium gasolines are now subject to a uniform rate of P4.35 excise tax per liter of volume capacity. In view of the foregoing, this Office hereby confirms your opinion that while the blending of LSR Naphtha with various constitutions of RON gasolines in order to produce compliant Regular and Premium Unleaded gasolines is considered "reprocessing" or "manufacturing" under Revenue Regulations No. 8-96, there is no longer additional excise tax due on the resulting Regular and Premium Unleaded gasolines after the blending since the Naphtha and RON gasolines components thereof have already been subjected to the uniform rate of P4.35 upon their importation. This ruling is being issued on the basis on the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void. CaASIc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service